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Dollar firms as US economic outlook improves

LONDON - The dollar gained against major currencies on Monday as last Friday’s stronger-than-expected US jobs report eased worries about a recession in the world’s biggest economy.

The US data helped the dollar recover from record lows versus the euro and a basket of currencies set at the start of last week and also diminished prospects of an interest rate cut by the Federal Reserve at the end of this month.

The futures market reflected a 54 percent chance the Fed would cut rates when it meets on October 31, lower than the 75 percent priced in as recently as last Thursday and the 85 percent nearly a week ago.

‘People can downplay the residual strength of the US jobs report, but it is still jobs and is consistent with steady growth,’ said Jeremy Stretch, currency strategist, at Rabobank.

‘It seems like higher average earnings along with strong equity markets would be able to sustain the US economy even if the housing market tanks for now,’ he added.

The dollar index firmed to 78.592, up 0.4 percent on the day and moving further away from record lows of 77.660 set earlier this month. By 1030 GMT, the euro was down 0.4 percent at $1.4084, about two cents below last week’s record highs.

Signs that European officials are growing increasingly worried about the euro’s elevated levels also kept the single European currency from making further gains.

European Central Bank Executive Board member Lorenzo Bini Smaghi said in an interview published on Sunday that if policymakers want to take action on the euro they are not tied to upcoming Group of Seven meetings.

On Monday German Economy Minister Michael Glos added to the rhetoric on the euro saying he was concerned about the weak dollar, particularly if it continued to decline.. Their comments put the spotlight on Europe’s finance and economy ministers meeting in Luxembourg on Monday and Tuesday, ahead of the G7 sessions at the end of next week.

‘People are nervous about the upcoming European economic finance ministers’ meeting and what they may say about the strength of the euro,’ Stretch said.

Trade was subdued with public holidays in Japan, Canada and the United States.

Improving risk appetite

Friday’s figures showed the US created 110,000 non-agricultural jobs in September, the most since May. The loss of jobs in August—seen as the key reason behind the Federal Reserve’s 50 basis point rate cut last month—was reversed to a gain and July’s numbers were also revised up.

This encouraged investors to buy back dollars after a heavy sell-off fuelled by expectations of more Fed cuts.

IMM data showed dollar shorts at their biggest levels since the start of the year in the week to Oct. 2, leaving plenty of room for position adjustments.

A slightly brighter outlook for the US economy helped boost risk appetite and also cheered prospects for countries which export to the United States.

‘The most immediate impact of Friday’s employment news was to put the bid back into the carry trades as risk appetite returned to the markets,’ said Boris Schlossberg, senior currency strategist at DailyFX.com.

‘Nowhere is this more evident than in the resource-rich economies of Canada and Australia, whose currencies have made record highs as demand for commodities from the emerging world continues to fuel growth in those regions,’ he added

In contrast, the low yielding Japanese yen—which is often used as a funding currency in carry trades—slipped to 2-1/2 month lows versus both the dollar and the euro.

The Bank of Japan meets to decide on rates on Thursday but most economists expect any rise in the overnight rate, now at 0.5 percent, will take place in 2008.